Question: A company I used to work for has registered to IPO. Apparently I have to wait 180 days until after the company goes public to sell. Is this typical? When do investors get to sell? What happens when everyone gets to sell at that 180 day point? Does the stock usually tank? Or is there a provision to spread out the sales?

The answer is “yes, it’s standard.” In fact, it is so typical that most financing documents of private companies lay out the restriction and get investor approval even in the earliest days of a company’s life.

There are exceptions, but when you see different provisions, it’s always driven by the investment bankers, not the company or investors.

As for what happens when the 180 day lockup comes off – it really depends on the company. More times than not, the price goes down as investors and others speed to sell some / all of their stock to take risk off the table. There are usually no provisions to spread out the selling.

Great question. There are actually provisions to ‘spread out the selling’ if you’re a significant shareholder (>10%?) and/or on the Board. The applicable rule is SEC Rule 144 which limits how much stock can be sold by significant shareholders/BOD members. I don’t know the full specifics but there are some limits in volume of shares that can be sold in a quarter (~1% I think) …

Anonymous

Using Bloomberg I pulled all IPOs back 10 years and ran performance from the 180 day point going forward 1 week, 2 weeks, 4 weeks, and 6 months. The data shows that new issues have actually outperformed the S&P over each period. 1 week: +12bps; 2 weeks: +0bps; 4 weeks: +41bps; 6 months: +270bps. Performance around the 180 day mark is likely a function of liquidity and how bad those who were previously “locked up” want out but overall it doesn’t appear to have a large impact on stock performance.

http://www.feld.com bfeld

Interesting data. I think as Jason said, it depends on the company. If it’s a strong company, then the price likely increases after the lockup comes off as the float increases and stock trades to new long term buyers who are building significant positions. If it’s a weaker company relative to expectations, there won’t be buyers so the stock will drift down.

http://lawshucks.com Law Shucks

It all comes down to Rule 144, which limits sales of restricted securities. I’d be surprised if you had found shorter periods on these sales, because that’s the minimum holding period for restricted securities of companies subject to reporting requirements (i.e., the issuer upon the IPO). Technically, if the company hasn’t IPO’d, the holding period is a year (but then your market options are limited). Holding periods “tack,” so you get the benefit of any time the meter ran on a previous transferor (but not the company).

The dribble-out rules mentioned below apply only to “affiliates,” which comes back to whether the person is in a control relationship – but it’s basically not applicable in this case where we’re talking about employees who received stock under the pre-IPO grant plan.

Anyone who holds certificated restricted securities should read the legend on the certificate. And I’m sure that the company’s grant document that you sign when you get the stock includes an indented paragraph that specifies what that legend has to be, so it’s in there even if you didn’t get certificates.

http://petegrif.tumblr.com/ Pete Griffiths

It is possible / legal to hedge such restricted stock?

Stevelk

Law Shucks…Can a private transaction occur within the lock-up period?

Beginning in 2005, Brad Feld and Jason Mendelson, managing directors at Foundry Group, wrote a long series of blog posts describing all the parts of a typical venture capital Term Sheet: a document which outlines key financial and other terms of a proposed investment...